I n t h I s c h a p t e r y o u w I l L

shoeleather cost
of
inflation because making more frequent trips to the bank causes your shoes to
wear out more quickly. Of course, this term is not to be taken literally: The actual
cost of reducing your money holdings is not the wear and tear on your shoes but
the time and convenience you must sacrifice to keep less money on hand than you
would if there were no inflation.
The shoeleather costs of inflation may seem trivial. And, in fact, they are in the
U.S. economy, which has had only moderate inflation in recent years. But this cost
is magnified in countries experiencing hyperinflation. Here is a description of one
person’s experience in Bolivia during its hyperinflation (as reported in the August
13, 1985, issue of 
The Wall Street Journal,
p. 1):
When Edgar Miranda gets his monthly teacher’s pay of 25 million pesos, he
hasn’t a moment to lose. Every hour, pesos drop in value. So, while his wife
rushes to market to lay in a month’s supply of rice and noodles, he is off with the
rest of the pesos to change them into black-market dollars.
Mr. Miranda is practicing the First Rule of Survival amid the most out-of-
control inflation in the world today. Bolivia is a case study of how runaway
inflation undermines a society. Price increases are so huge that the figures build
up almost beyond comprehension. In one six-month period, for example, prices
soared at an annual rate of 38,000 percent. By official count, however, last year’s
inflation reached 2,000 percent, and this year’s is expected to hit 8,000 percent—
though other estimates range many times higher. In any event, Bolivia’s rate
dwarfs Israel’s 370 percent and Argentina’s 1,100 percent—two other cases of
severe inflation.
It is easier to comprehend what happens to the 38-year-old Mr. Miranda’s
pay if he doesn’t quickly change it into dollars. The day he was paid 25 million
pesos, a dollar cost 500,000 pesos. So he received $50. Just days later, with the rate
at 900,000 pesos, he would have received $27.
As this story shows, the shoeleather costs of inflation can be substantial. With the
high inflation rate, Mr. Miranda does not have the luxury of holding the local
money as a store of value. Instead, he is forced to convert his pesos quickly into
goods or into U.S. dollars, which offer a more stable store of value. The time and
effort that Mr. Miranda expends to reduce his money holdings are a waste of
s h o e l e a t h e r c o s t s
the resources wasted when inflation
encourages people to reduce their
money holdings

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C H A P T E R 2 8
M O N E Y G R O W T H A N D I N F L AT I O N
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resources. If the monetary authority pursued a low-inflation policy, Mr. Miranda
would be happy to hold pesos, and he could put his time and effort to more
productive use. In fact, shortly after this article was written, the Bolivian inflation
rate was reduced substantially with more restrictive monetary policy.
W
HENEVER GOVERNMENTS TURN TO THE
printing press to finance substantial
amounts of spending, the result is hy-
perinflation. As residents of Serbia
learned in the early 1990s, life under
such circumstances is far from easy.